Adjusting Exponential Lévy Models Toward the Simultaneous Calibration of Market Prices for Crash Cliquets
24 Pages Posted: 28 Jul 2016
Date Written: July 28, 2016
In this paper, option-calibrated exponential Lévy models are observed to typically overprice crash cliquets. Typical model Lévy tails are then not crash-market consistent. A general tail-thinning strategy is introduced that may be implemented on a class of parametric Lévy models closed under exponential tilting. Implementation on the Carr-Geman-Madan-Yor (CGMY) model leads to the CGAKMY model with a thinning function of (1 Α | χ |)-Κ. It is observed that this model adjustment can be crash market consistent.
Keywords: completely monotone function, Gauss Laguerre quadrature, gap risk pricing, beta exposure pricing, CGMY model, negative binomial process
Suggested Citation: Suggested Citation